Peso Cost Averaging

Peso cost averaging is an investment practice whereby you invest an unchanging peso amount at regular intervals of your choice (preferably every month) into a specific investment vehicle(s). This method puts time, your money, and the market all on your side, regardless of what stock market does over the short term.

Some people think they can time the market, that is: buying low and selling high. But many have lost a lot of money trying to outguess it. If you took all the money and made an outright purchase of stocks, you will not be as big a winner as you had used the peso cost averaging technique. Let us say you have P12,000 you want to invest, and you know which stock you want to buy. You have been watching it for some time, and you have seen it go as high as P15 a share. Recently it has taken a tumble to P10. You think to yourself, now is the time to buy. You invest all P12,000 at once making an outright purchase of 1,200 shares at P10 a share. One year later, your stock is selling at P5 a share. You are down P5 a share, or you now have a paper loss of P6,000.

If you had taken that same P12,000 and invested it using peso cost averaging, you’d have invested the same amount of money month in, month out, regardless of what market was doing. Here is how you would have come out in this exact same scenario.

Month	Price	Shares Bought
1	P10	100
2	9	111
3	8	125
4	7	143
5	8	125
6	9	111
7	6	167
8	8	125
9	7	143
10	6	167
11	5	200
12	5	200

Summary:  P12,000 invested; 1,717 shares bought

As you can see, by using peso cost averaging, you are able to buy more shares of stock when the price is low. So after one year you have a total of 1,717 shares, and even though the price per share is still down, at P5, your holdings are worth P8,585 and your loss on paper is only P3,415, or about P2,585 less than if you had purchased the stock outright.

Comparison:

P3,415 loss with peso cost averaging

P6,000 loss with outright purchase

In upward market, your investment of that same amount in peso cost averaging increases. When the price of the stock goes back to P10 a share, here is the comparison. With the outright purchase, you investment will be worth the original P12,000. But with peso cost averaging, you had accumulated 1,717 shares, or 517 more than if you had made an outright purchase. In this scenario, when your share price is back up to P10, your, 1,717 shares will be worth P17,170. This is P5,170 more than your original P12,000 investment, or about a 43% on your money. With peso cost averaging, you limit your loss in a down market, and when the price per share goes back up, you make more as well. The key to this is that you are always buying more shares of your investment at a lower price, as the above table shows.